A band of Democratic presidential hopefuls is pitching a tax on wealth as a way to reduce economic inequality while funding ambitious public projects. Adopting one could bring big changes to Silicon Valley, a global hotspot of wealth thanks to the tech industry. 

First, the obvious: a federal wealth tax would cut into big fortunes in the Bay Area. Wider in scope than taxes on income, wealth taxes require individuals to pay a fee on the portion of their net worth — calculated as assets minus debts — that exceeds some threshold.

“Silicon Valley would certainly be very affected by the wealth tax,” said Cristobal Young, a sociologist who studies income inequality. “There’s a lot of money that’s made in Silicon Valley that’s never reported as income and is never taxed.”

If a “moderate” wealth tax had been implemented in 1982, Amazon founder Jeff Bezos would’ve had half of his world-leading fortune in 2018, according to an analysis by UC Berkeley economists Emmanuel Saez and Gabriel Zucman, advisers to wealth tax proposals by Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.). 

That’s part of the point. When announcing his wealth tax proposal in September, Sanders said, “I don’t think that billionaires should exist.” 

But others warn that a wealth tax could do more than siphon off cash from the ultra-rich. The tax would probably lead to decreased investment in Silicon Valley, according to Ilya A. Strebulaev, a professor at Stanford’s business school and a research associate at the National Bureau of Economic Research.

While a heightened incentive to make high-risk investments could actually boost investment in the region, a reduced amount of capital to invest would have the opposite effect, he said. On balance — and pointing to the record of wealth taxes in Europe, where several nations have adopted and abandoned them — Strebulaev predicted diminished investment in Silicon Valley if a wealth tax were implemented. 

“Am I absolutely certain? Of course not,” he said. “But likely it will lead to a decrease in overall investment, including investment in innovation.” 

“I think that this country became great — and continues to be very economically productive — because of innovation, including innovation in Silicon Valley,” Strebulaev, who also serves as director of the Stanford Venture Capital Initiative, added later. 

With current debate about a wealth tax centered on economic inequality, Strebulaev said there hadn’t been enough analysis of broader potential economic consequences. 

“That’s what worries me,” he said. 

Politicos who support a wealth tax say it would address a skewed distribution of wealth and support projects à la “Medicare for All” and universal childcare — but the exact details of their plans differ. Tom Steyer M.B.A. ’83, the billionaire former Stanford trustee, has called for a 1% annual tax on wealth above $32 million. Sanders advocates the same $32-million floor, but with a rate ratcheting up with increasing wealth, starting at 1% and climbing to 8% after $10 billion. Warren would target a smaller group of households, with a fee of 2% on wealth over $50 million and 6% beyond $1 billion.  

Zucman, the advisor to Sanders and Warren’s wealth tax proposals, who also spent a year at the Stanford Institute for Economic Policy Research, said that a wider pool of investors than America’s ultra-rich, including pension funds and foreign investors, can invest in Silicon Valley. He said a wealth tax would not have a significant impact on the area’s economic ecosystem at large.

“When you think about what determines business creation and entrepreneurship, I’m not saying taxes are completely irrelevant, but they’re very low down the list of the things that matter,” he said, ascribing greater importance to factors like workforce education and infrastructure. Bill Gates, Zucman pointed out, founded Microsoft in 1975, when the top marginal tax rate was 70%.

“It’s not going to make a big difference essentially also because everybody can innovate,” he added, emphasizing the small number of individuals who would be affected by a wealth tax. “Innovation is not just done by a few billionaires or a few extremely wealthy individuals.” 

Some skepticism of wealth taxes involves faith in the ultra-wealthy’s use of their own resources. Last month, Zucman came to Stanford’s business school to discuss a book he co-wrote, “The Triumph of Injustice.” In a riff on the book’s claim that an extra dollar is more valuable if held by a poor person than Bill Gates, an audience member asked, “Is an additional dollar more useful in the hands of Bill Gates or the U.S. government? I actually don’t know.” 

Others have been more direct. In October, Wall Street Journal columnist Andy Kessler, who co-founded a Palo Alto-based investment firm, wrote that a wealth tax “takes money out of the hands of some of the most productive members of society and directs it toward the least productive uses.” 

Richard A. Epstein, the Hoover Institution senior fellow and influential legal scholar, has slammed Warren’s proposal as unconstitutional and economically misguided in essays. In an interview with The Daily, he condemned the plan’s stipulation that citizens pay 40% of their wealth beyond $50 million if they renounce their citizenship, intended to prevent the loss of tax revenue. 

“The only reason you impose exit taxes is because you don’t think there’s enough positive carrots to keep people around,” he said. 

He called the proposal a “loser” and predicted large effects on economic growth. In a February column, he warned that Warren’s plan diverted funds from more productive uses. 

“Most rich people do not idly count their wealth sitting under palm trees; they continue to reinvest it in new projects that require both equity and debt capital,” he wrote, contending that a wealth tax could require an entrepreneur “to liquidate part of his business — or to divert his assets from investment and business growth to the payment of taxes.” 

“Perhaps Saez and Zucman believe the government makes better use of capital than our most successful entrepreneurs, but that’s an economic pipedream,” he added. “There is no way that the rate of return from public investment will approach that of startups.”

Zucman said that in the long run, government spending in areas like early childhood education was what would fuel growth in America. Young, the income inequality expert who left Stanford for Cornell last year, stressed a distinction between wealth accumulated by elites and that which is deployed for public benefit. 

“Well, the social rate of return is certainly much higher — investing in infrastructure, education and water — than the social rate of return from a parking app or something,” he said. “It’s true that the private rate of return on these companies has been enormous, but that’s different. I mean, do we, at the end of the day, care about how many billions Zuckerberg has in his bank account?”

Young said that the Bay Area stood to benefit from the revenue raised by a wealth tax, describing investment in areas like housing and transportation as long overdue and important to the region’s economic growth. 

Palo Alto Mayor Eric Filseth ’83, a former tech executive, was skeptical that the tax would stifle innovation in Silicon Valley. 

“When you’re trying to develop a new tech product,” he said, “you’re not sitting there going, ‘Boy, if I ever made $50 million, you know, they might try to take away a little bit.’”

Despite disagreement over its constitutionality and potential impact, a wealth tax proposal like Warren’s enjoys broad support among the American public, according to polling.

San Francisco residents Frank Jernigan and Andrew Faulk are members of the Patriotic Millionaires, a collection of wealthy Americans pushing for higher taxes on the rich. While the scope of current wealth tax proposals wouldn’t extend to their wealth, they wish it would. 

Faulk, a retired physician, and his husband Jernigan, who retired after four years as an early employee at Google, say it would make no material difference to them — and that more spending in areas like education and healthcare would improve the lives of others and reduce their financial anxieties. 

“If we would tax more,” Faulk said, “think of the fear and the worry that would be drained out of the American population.”

“We’re not in favor of taxing the rich because we’re just really great people and we’re very magnanimous and altruistic,” Jernigan said. “We’re in favor of this because we think it makes a better society.”

Contact Charlie Curnin at ccurnin ‘at’ stanford.edu.